A growing-equity mortgage (GEM) is a type of fixed-rate mortgage where monthly payments increase over time according to a set schedule, differing from conventional mortgages with fixed and equal payments. The interest rate remains unchanged, avoiding negative amortization. Instead, the initial payment is structured as a fully-amortizing payment. As payments increase, the extra amount is directed towards the remaining mortgage principal, effectively shortening the loan term and reducing overall interest.
Key Insights
- A growing-equity mortgage (GEM) integrates scheduled additional principal payments, increasing typically by 5% annually.
- This accelerated payment structure allows for faster loan payoff and lower total interest payments.
- The FHA provides GEM loans targeting borrowers with high potential earnings growth to afford incremental payments, along with lender insurance against losses.
How Growing-Equity Mortgages Operate
A growing-equity mortgage empowers borrowers to advance their mortgage repayment by adding scheduled principal payments that increase over time. This method facilitates earlier loan payoff and quicker home equity build-up, which can be beneficial if leveraging home equity. Payment schedules usually escalate annually, often up to 5% per year.
Important Consideration: Since payments rise annually, the borrower’s financial capacity, particularly income growth, must account for these increases.
It’s essential not to confuse GEMs with graduated payment mortgages. Although both have fixed interest rates and incremental payment increases, graduated payment mortgages often start with payments below the fully-amortizing amount, leading to negative amortization rather than interest savings.
Additional Notes on GEMs
Applying for a growing-equity mortgage resembles the application procedure for other mortgage types, with similar credit assessments. This mortgage could include options for lower down payments, perfect for first-time home buyers who might face challenges with initial purchase costs.
Furthermore, GEMs are tailor-made for those who may not qualify for traditional loans. The Federal Housing Administration (FHA) supports a growing-equity mortgage program aimed at borrowers with limited but promising future incomes. FHA-backed GEMs protect lenders from borrower default and can be applied to new purchases, refinancing, and property rehabilitations—including condominiums and cooperative housing.
Related Terms: Fully-Amortizing Payment, Graduated Payment Mortgage, Principal, Negative Amortization.
References
- U.S. Department of Housing and Urban Development. “Section C. Home Mortgage Insurance Programs”, Pages 1-C-37 and 1-C-38.
Get ready to put your knowledge to the test with this intriguing quiz!
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## What is a Growing-Equity Mortgage (GEM)?
- [ ] A mortgage where the interest rate adjusts periodically based on a specific benchmark
- [x] A mortgage with scheduled increases in monthly payments that result in a shortened loan term
- [ ] A mortgage with fixed monthly payments throughout the term
- [ ] A mortgage that decreases equity growth over time
## What is the primary benefit of a Growing-Equity Mortgage?
- [ ] Decreasing monthly payments over time
- [x] Accelerated loan payoff
- [ ] Fixed interest rate
- [ ] Minimal up-front cost
## How do monthly payments behave in a Growing-Equity Mortgage?
- [ ] They remain constant throughout the term
- [x] They increase at scheduled intervals
- [ ] They decrease over time
- [ ] They fluctuate based on market conditions
## What is a typical characteristic of a Growing-Equity Mortgage?
- [ ] Payments only include interest for the first few years
- [ ] The mortgage principal grows over time
- [x] Regularly scheduled payment increases
- [ ] Payments are interest-only throughout the loan term
## Who might benefit most from a Growing-Equity Mortgage?
- [ ] A borrower expecting stagnant or declining income
- [ ] An investor looking for a long-term property rental
- [x] A borrower expecting gradual income increases
- [ ] A person looking for a reversible mortgage
## Why might a borrower choose a Growing-Equity Mortgage?
- [ ] To minimize the borrower's interest rate risk
- [x] To pay off the mortgage faster
- [ ] To lock in a low interest rate over a long period
- [ ] To reduce monthly payment obligations incrementally
## Which type of borrower typically uses a Growing-Equity Mortgage?
- [ ] Someone seeking minimal monthly payment changes
- [ ] Someone wanting to buy a home with a balloon payment down the line
- [ ] Someone desiring a graduated payment mortgage (GPM)
- [x] Someone anticipating increasing earnings over time
## What distinguishes a Growing-Equity Mortgage from an Adjustable Rate Mortgage (ARM)?
- [ ] ARM payments grow predictably
- [x] GEM payments increase on a fixed schedule, ARM payments vary with interest rates
- [ ] ARM payments decrease with increased equity
- [ ] GEM payments are based on fluctuating market rates
## Which of the following is true about the interest rate in a Growing-Equity Mortgage?
- [x] It is usually fixed, even though payments increase
- [ ] It adjusts based on a benchmark rate
- [ ] It decreases as equity increases
- [ ] It remains constant over the term, with constant payments
## How can the payment increases in a Growing-Equity Mortgage might impact the interest paid over the life of the loan?
- [ ] It increases the total interest paid
- [x] It decreases the total interest paid by accelerating principal repayment
- [ ] It has no effect on the interest paid
- [ ] It defers the interest until the end of the term
